Charles Black oversees The Irvine Co.’s 7 million square feet of properties in San Diego County, including 3 million square feet of office space Downtown. (photo/lambertphoto.com)

Charles Black and his wife, Donna, own a home in Jamul but spend a couple of nights a week at a Downtown condominium they purchased in 2004. The Grand South is one of two high-rise residential projects built on Pacific Highway near the Santa Fe Depot by developer Nat Bosa, with whom Black is well acquainted, and is within strolling distance of Petco Park, home of the Padres, with whom Black also is familiar.

Black, 58, former president of the Padres and leader of the development team that created the ballpark, was lured away from JMI Realty in March by the privately held Irvine Co. to become senior vice president of its San Diego region, which owns 7 million square feet of Downtown and suburban office properties and five apartment communities. Its Downtown properties total 3 million square feet; suburban office properties 1.8 million square feet.

“It was an opportunity I couldn’t refuse,” says Black, an Air Force captain and practicing Downtown attorney before he fell in love with real estate. “I have long been a fan of The Irvine Co. It is a model of master planning.”

While Black declines to discuss any possible deal with Bosa, it is known that The Irvine Co. has come to an understanding with Bosa that would lead to Irvine’s early 2007 purchase of the block just west of the Santa Fe Depot for development of about 650,000 square feet of office space in about 34 stories. If that deal goes through, The Irvine Co. — already Centre City’s largest office landlord with six towers — will reinforce its belief that the Downtown market is on the cusp of significant growth. Adding to that notion is the development of other new office buildings such as the 15-story DiamondView Tower overlooking the ballpark that is set to open in spring.

While Black envisions greater future office growth Downtown, he isn’t about to describe it as a renaissance. “It’s premature to use that term in this market,” he says. “There are a lot of factors in play here. But I should emphasize the support the office market has gotten from the government and the public. CCDC has been the shepherd. Office development has been a high priority for the CCDC.”

Black also sees a “fair amount of evidence” that Downtown office growth has lagged behind the regional growth in the market and that it has continued to lose market share. “Only about 450,000 square feet or 500,000 square feet of office has been developed Downtown over a 15-year period and 70 pecent of the office inventory is over 20 years old,” he says.

The Irvine Co. purchased 501 West Broadway last year for $150 million. The company is Downtown’s largest landlord.

Kraig Kristofferson, senior vice president with CB Richard Ellis, calls the changes taking place Downtown a “revival” rather than a renaissance. “Downtown San Diego has always had the largest inventory of office space and Class A office space among the San Diego submarkets,” Kristofferson says. “It has always been the governmental, financial and cultural hub of the city. There has never been a major exodus from the office market, and the cyclical downturns in the market have been no different than those in the suburban markets, except perhaps during the ‘tech wreck’ when the suburban markets experienced more difficulties because of their more technical tenant base.”

The Downtown market, Kristofferson adds, enjoys low vacancy and increasing rents. “The real revival,” he says, “has been related to investor interest. The institutional pursuit of Class A core assets in the central business district has been the most significant because Downtown has the largest number of large trophy properties allowing for significant amounts of money to be placed in a market in sought-after Southern California.”

Although The Irvine Co. has been investing in San Diego property for more than 25 years, it did not start acquiring Downtown office buildings until 2003, when it purchased Symphony Towers for $134 million. (See chart on Page 49.) That was followed in 2004 with its purchase of Wells Fargo Plaza for $48 million, the acquisition of 101 W. Broadway and 225 Broadway for $263 million in 2005 and this year’s acquisition of 501 W. Broadway for $150 million and One America Plaza for $300 million. (Outside of Downtown, the company owns the 352,000-square-foot La Jolla Gateway and 734,000-square-foot Eastgate Technology Park in University City and the 610,000-square-foot Canyon Ridge Technology Park and 75,050-square-foot Cornerstone Corporate Center in Sorrento Mesa. La Jolla Gateway was its first investment in San Diego, purchased in 1982. All of its suburban offices are mid-rises or shorter.)

Black says a number of factors influenced The Irvine Co.’s investments Downtown. “San Diego’s gross regional product is growing at a faster rate than California’s and the nation’s and we have one of the youngest populations in the nation,” he says. “We have a strong university system, and a lot of recreational and cultural amenities. Some 22,000 jobs were added in 2005 and the expectation is for an additional 23,000 jobs in 2007. We have a low unemployment rate. There are very strong indicators that the economy is going to be strong.”

To Kristofferson, the most significant impact on the Downtown office market has been in the acknowledgement of redevelopment efforts, particularly residential growth, which has become a true renaissance. He says $6.5 billion in private capital has been invested with 11,000 new residential units, 4,000 new hotel rooms, the 42,000-seat ballpark, the San Diego Convention Center doubled in size, 75,000 miles of underground fiber optic cable “and a trolley system used by 25 percent of the work force.” Like Black, Kristofferson’s optimism about Downtown office market growth is based on projections of the population tripling to 90,000 in the next 25 years, the work force more than doubling, from 75,000 to 165,000 and the privately held office space tripling from 10 million square feet to 30 million square feet.

Broker Jason Hughes, a principal with Irving Hughes, which represents only tenants, offers a cautionary word about such optimism. “The issue,” he says, is: “If you build it, will they come? If you remodel it, will someone pay for it? If you buy it at crazy purchase prices, will companies rent it at high enough rents to justify the investment?”

The “craziness” that has gone on with commercial building purchases “has been nothing short of a frenzied bidding war,” Hughes says. “All of the justifications are done through assumptions. Magically, assumptions just keep getting more and more optimistic, meaning investors assume higher rents, less tenant concessions, quicker lease up rates, in order to rationalize higher purchase prices.”

Most of the new investors in Downtown are realizing not everyone can or will pay the new rents, particularly when parking expenses are going up as fast as rental rates, claims Hughes.

“What Downtown landlords are finding is that Downtown is mostly a big game of musical chairs. In order to fill vacant space, the landlords need to be very aggressive in their deals. Otherwise, tenants simply renew or move to another part of the county. This has led to an average ‘time on the market’ for vacant space in Downtown of nearly two years.”

Despite his pessimism about the market, Hughes says he is a big fan of The Irvine Co. “I think they are the most professional landlords Downtown, and they have a great portfolio of buildings. They also, thankfully, insist on keeping their properties in Class A condition, constantly spending money to maintain their position as the best buildings in Downtown.” (The Irvine Co. has budgeted $43 million in 2006-2007 to bring its Downtown and suburban office properties up to its standards out of a total $63 million in renovations for all its properties.)

If The Irvine Co. is bullish on Downtown, so too are others. “What we have been talking about the last five years has arrived,” says Frank Wright, a broker with Grubb & Ellis|BRE Commercial. “There’s been so much investment activity and with residential growth — all the cranes in the air — and the Hilton under construction…you can’t help but talk about it. We’ll see some growing pains strictly from supply and demand. But the long-term prognosis is very good. The short term is stable.”

Legacy Partners, a privately held real estate company headquartered in Foster City, purchased the 24-story 600 B Street property in July for $95.5 million and is planning more than $3 million in capital improvements to the building’s exterior and common areas. Wright says the building is 98 percent leased with the city of San Diego occupying nearly 50 percent of the space. But Comerica Bank will vacate its space there to move into DiamondView Tower in mid-2007, leaving the ground and second floors available for lease and an opportunity for top signage on the building.

Recently, there have been many big deals, but many small deals too.

MetroWork, a nine-story, $25 million office condominium project by Berkson Realty Advisors, is scheduled for completion in January at the midpoint of the block bounded by India, Columbia, A and Ash streets.

At the 12-story Columbia Square, brokers have negotiated 15 leases since the beginning of the year that are valued at $8.2 million, raising occupancy to more than 90 percent. Anderson Mann & Hilbert, a law firm, is taking 3,200 square feet in the 143,574-square-foot building.

Indeed, while only one building, Broadway 655 with less than 400,000 square feet of office space, has been added to the Downtown office inventory in the last 15 years (while 57 million square feet of office and light industrial space have been added to San Diego’s clogged suburban markets in the same period), Howard-Sneed Interior Architecture has found itself increasingly busy in the Centre City. In the last two years alone it has designed 370,000 square feet of law firms’ office space Downtown, including 170,000 square feet for Lerach Coughlin Stoia Geller Rudman & Robbins on seven floors of B-655, 25,000 square feet for Pillsbury Winthrop Shaw Pittman in the Koll Center, 60,000 of remodeled space in One America Plaza for Luce Forward Hamilton & Scripps, 30,000 square feet in B-655 for Best Best & Krieger, 72,000 square feet in One America Plaza for Latham & Watkins, and 12,000 square feet in the Union Bank Building for Procopio.

Broadway 655, Rob Lankford’s new $140 million office tower, is approaching 90 percent occupancy. Ed Muna, senior vice president at Lankford & Associates, says 10 lease transactions have been completed this year. “When we opened less than a year ago, our goal was to have a fully leased project within two years,” says Muna. “It looks as if we will be almost one year ahead of schedule.” The building was aggressively marketed as the first new Class A office building opened Downtown since 1991 and Muna says potential tenants who toured the place liked the idea of building their offices from scratch. The building will be renamed Advanced Equities Plaza after the Chicago-based Advanced Equities Financial Corp., which signed a 10-year lease for 50,000 square feet.

Downtown will see its first Class A high-rise office condominiums when the $25 million Metrowork is completed in January. Developer Howard Berkson, managing member of Berkson Realty Advisors, says final units are being released for sale. Twenty-seven condo office suites range from 1,188 square feet to 2,752 square feet and prices start in the low $600,000s. The nine-story building is going up at the midpoint of the block bounded by India, Columbia, A and Ash streets.

“Nearly 80 percent of office space Downtown is leased by companies occupying less than 10,000 square feet,” says Berkson. “There are no small buildings left to buy in the Downtown core and the demand for high-end office space, particularly under 5,000 square feet, outstrips supply as well as affordability.”

Cruzan|Monroe’s TR Produce office condo project, which was completed earlier this year across from centerfield at Petco Park, has sold more than half of its 28 units. The three-story building, formerly the Wellman-Peck Building, was purchased by Cruzan|Monroe in 2003.

Cisterra Partners’ 15-story DiamondView Tower is nearing completion just outside the right field fence of Petco Park. It is scheduled to open early next year.

Cisterra Partners’ Diamond-View Tower is scheduled to open early next year with major office tenants Cox Media, Comerica Bank and CB Richard Ellis. The building just acquired its first retail tenant, It’s A Grind, a coffeehouse, which took a 10-year lease for 1,420 square feet on the ground floor. Jason Wood, director of development for Cisterra Partners, says more office leases are in the works.

Manchester Financial’s Pacific Gateway plans for the 14-acre Navy Broadway Complex could add another 400,000 square feet of office space in the near future, and 1.6 million square feet at build-out, if the proposal survives scrutiny from the Centre City Development Corp. Other potential office development sites include Westfield’s Horton Plaza property, the city-controlled land immediately north of One America Plaza, and JMI Realty’s Ballpark Villages, which has a minimum of 300,000 square feet of office space penciled in. However, John Kratzer, president and CEO of JMI, says through a spokeswoman that there hasn’t been any significant interest in the office land. Even though office rental rates have risen, the increases in construction costs make it difficult for office development to pencil out, Kratzer believes.

Black says The Irvine Co. has no plans for the property north of One America Plaza. Nor does it have any interest in Ballpark Villages’ planned office space. “We view that as primarily a residential area,” he says. “That’s not the kind of uses The Irvine Co. is interested in.” The company, adds Black, will continue to consider other acquisitions Downtown as they come available.

101 West Broadway was acquired by The Irvine Co. in 2005. It is one of six large Downtown office buildings purchased by the company since 2003.

Black works out of an office at 101 W. Broadway, which the company acquired this year. His San Diego team includes Thomas Sullivan, a real estate consultant hired at the same time Black was, as senior vice president of development; Steve Center, regional vice president for leasing; and Pamela Van Nort, senior director of operations. The team spends more than half its time on the company’s Downtown properties.

Black earned his law degree from UC Davis in 1978 and practiced law Downtown before turning to real estate, but says it doesn’t necessarily take a law degree to understand the complexities of real estate projects. “More than anything, it takes the ability to move projects ahead and to learn how to work with government agencies and the public,” says Black.

Black says The Irvine Co.’s suburban office projects are not necessarily competitive with its Downtown properties.

“Typically, the users Downtown are heavy into financial services, government and the law,” he says. “The suburban tenants are in biotech, defense and technology.”

But should tenants worry that the company will force lease rates up because of its large Downtown holdings? “I don’t think so,” says Black. “There are so many choices in San Diego County. They (tenants) have the ability to go to the suburbs and to other Class A buildings.”

Despite his concerns about rising leasing rates and the high cost of Downtown parking, Hughes says The Irvine Co.’s move into Downtown is good for the area and good for the company.

“The company is privately owned and not at the mercy of Wall Street or pension funds,” Hughes says. “It owns most, if not all of its buildings debt free. They can do whatever ‘deal’ they want. There is no risk for them at all. Maybe they won’t make as high of a yield as planned originally, but The Irvine Co. typically buys and holds forever. Long-term owners like them are in a league of their own. I think they feel that Downtown San Diego has great long-term prospects, and economies of scale only help them reduce their operating expenses and help to be market makers.”